Treasuries Post First Monthly Decline Since August on Fed Views

Nov. 30 (Bloomberg) -- Treasuries had their first monthly
loss since August on speculation that November jobs gains may
signal faster economic growth and convince the Federal Reserve
to vote next month to scale back bond-buying.

The benchmark 10-year yield rose amid improving economic
indicators, starting with a report showing the economy created
more jobs than forecast in October and increases in retail sales
and home prices. A $29 billion auction of seven-year notes on
Nov. 27 attracted the least demand since May 2009. The Labor
Department report on Dec. 6 may show employers added 183,000
jobs this month and the unemployment rate dropped to 7.2
percent, the lowest level since 2008, according to Bloomberg
surveys of economists.

“The market is going to price in some probability for the
Fed at each and every meeting for the possibility that they
taper,” said Dan Mulholland, head of Treasury trading at BNY
Mellon Capital Markets in New York. “Next week, we’ll learn a
lot more when we get the report for employment in November, and
obviously that will be a key determinant in what the Fed does.”

The benchmark 10-year note yield rose 19 basis points this
month, or 0.19 percentage point, to 2.75 percent in New York,
according to Bloomberg Bond Trader prices. The 2.75 percent
securities maturing in November 2023 traded at 100 1/32. The
yield reached 2.86 percent on Nov. 21, the highest level since
Sept. 18.

Bond Losses

Treasuries lost 0.4 percent in November as of Nov. 28, and
were down 2.3 percent in 2013, based on the Bloomberg U.S.
Treasury Bond Index.

The yield on five-year notes rose four basis points to 1.37
percent. The gap between five- and 10-year yields widened to
1.43 percentage points on Nov. 20, the most since July 2011 as
investors bet any move to reduce bond purchases is accompanied
by forward guidance from policy makers that would extend the
Fed’s commitment to holding its overnight target rate between
zero and 0.25 percent for a longer period.

U.S. 10-year note yields closed about four basis points
below their level of Aug. 30 when the consensus among investors
was that the Fed would begin ratcheting back bond purchases at
its September meeting.

“You’ve been fooled by the Fed” in September when policy
makers unexpected opted not to reduce purchases, said Michael
Franzese, senior vice president of fixed-income trading at ED&F
Man Capital Markets in New York. “This is the one big question
everybody’s focused on.”

Economic Outlook

Monthly job growth is averaging 186,300 this year, the most
since 2005. The projected November jobs gain would be less than
the 204,000 increase in October, while the jobless rate would be
down from 7.3 percent the previous month.

Retail sales rose 0.4 percent in October, the Commerce
Department said Nov. 20, the biggest jump in three months. Home
prices in 20 U.S. cities rose by the most since February 2006 in
the 12 months through September, an S&P/Case-Shiller index of
property values showed Nov. 26.

“Thoughts of possible tapering in December” have driven
10-year yields higher on the month, said Matthew Duch, a fund
manager at Calvert Investments in Bethesda, Maryland, which
oversees more than $12 billion in assets. “You’ve got to get
strong, confirmable numbers to justify any action in December.”

Fed officials said they may reduce their $85 billion in
monthly bond purchases “in coming months” as the economy
improves, minutes of their last meeting issued on Nov. 20 show.
The central bank plans to purchase $45 billion in Treasuries in
December via 18 operations, including two each on Dec. 3 and
Dec. 19, according to a statement published on the Fed Bank of
New York website.

Fed Plans

A cut in Fed bond purchases is “on the table” for the
next policy meeting Dec. 17-18 depending on the performance of
the economy, Fed Bank of St. Louis President James Bullard said
last week.

Treasury sold $96 billion of coupon-bearing securities this
week. Stronger demand at the shorter-maturity auctions reflected
the central bank’s statements that it will keep short-term
interest rates at almost zero beyond reports of stronger
economic growth.

Demand at the seven-year note sale, as measured by the bid-to-cover ratio that compares total bids with the amount of
securities offered, was 2.36, compared with average for the past
10 auctions of 2.59. A $32 billion offering of two-year notes
Nov. 25 attracted a 3.54 ratio, the most since April, while the
Fed’s 21 primary dealers retained the smallest share of the Nov.
26 offering of $35 billion five-year debt since July.

“Forward guidance takes you out to five years” and “will
keep the front end firm,” said Thomas di Galoma, head of U.S.
rates sales at ED&F Man Capital Markets in New York. “The back
end has got an issue. Accounts are trying to sell the back end
because they’re afraid of tapering in December.”

Investors bid $2.86 for each dollar of the $1.964 trillion
in U.S. government notes and bonds sold at auction this year,
according to Treasury data compiled by Bloomberg. That’s down
from the record $3.15 for the $2.153 trillion sold at last
year’s offerings.